By Jean-Martin Louw, Associate at Collyer Bristow.

As the digital economy continues to expand and ongoing developments in fin-tech send money flying around the world with unprecedent speed and ease, financial institutions are struggling to balance compliance responsibilities and appropriate de-risking with their customer care obligations.

Unfortunately, ordinary customers often get caught in the crossfire and can be left without access to their funds for some considerable time, with potentially disastrous consequences.

So what can you do if a bank has frozen your account or threatens to discontinue your banking services?

Why is your account being closed or frozen?

The reasons why a bank might discontinue its relationship with you and decide to close your account can be myriad, but generally relate to a perceived risk for the institution. This can be fraud risk, credit risk, reputational risk, or some other apparent risk stemming from the bank’s lack of expertise in relation to a particular industry, business or country. A bank may, for example, take a policy decision to stop banking with ship owners if there is a spate of defaults due to piracy

On the other hand, if your account has been unexpectedly frozen, the most common trigger is generally a concern over fraud or money laundering.  Most banks monitor electronic activity using algorithms, which flag suspicious transactions. This can occur when large or unexpected sums are transferred in or out, particularly to and from accounts with links to certain countries that are deemed higher risk.

What can you do about it? Closed account

Provided that adequate notice has been given, there may be little that customers can do when a bank decides to close their account.

The Financial Ombudsman has made it clear that it requires banks to give reasonable notice of at least 30 days if they intend to close a personal bank account. This is intended to allow the customer sufficient time to make alternative banking arrangements and it is recognised that a longer notice period may be appropriate for business customers.

Importantly, however, the reasonableness of bank’s or electronic money institution’s conduct should always be measured against its customer care obligations in the Financial Conduct Authority’s Banking Conduct of Businesses sourcebook (often referred to as “BCOBS”). Under BCOBS, a banking institution must in all circumstances pay due regard to the interests of its customers, treat them fairly and communicate information to them in a clear manner. Particular care must be given when dealing with a customer who might be in financial difficulty.

With that in mind, the fairness of a bank’s decision to close an account must be viewed in light of the ongoing global pandemic. Given the harsh circumstances that many businesses find themselves in, the closure of an operational bank account on very short notice could have a severe impact on an organisation’s ability to continue trading. For various reasons outside of the business’s control it (at present) may find it very difficult to open a suitable new bank account. This may partly be due to an uncertain future for the business itself causing concerns, particularly if borrowing is contemplated or required alongside. In the present circumstances, banks are also very busy dealing with issues that have arisen for existing customers and have their own difficulties assessing the risks involved in dealing with different types of business. This means their focus is not presently on opening new accounts.

If you consider a bank to have acted unreasonably, you can ask the Financial Ombudsman to review its decision. Last year, the Cabinet Office issued guidance on responsible contractual behaviour in the performance of contracts impacted by the Covid-19 emergency. This guidance emphasised the need for parties to “act responsibly and fairly, support the response to Covid-19 and protect jobs and the economy” to ensure better long-term outcomes for Britain. The Financial Conduct Authority has also written to banks, imploring them to be “focussed on ensuring that SMEs are treated fairly.”

In light of this guidance, the Financial Ombudsman may be sympathetic to your circumstances. It is also worth mentioning that if a bank’s decision to close your account is expected to have particularly adverse consequences (which could not be compensated by an award of damages), then it may be possible to apply for a court injunction restraining the bank from doing so.

Frozen account

Sometimes, a bank might freeze or purport to close a bank account without giving any notice, which is generally permitted under their terms and conditions in “exceptional circumstances”. It will usually occur where the bank suspects that fraud or money laundering may be occurring or is imminent.

When a bank suspects money laundering, it has a regulatory duty to freeze the account and report the matter to the National Crime Agency (“NCA”) by filing a Suspicious Activity Report (“SAR”).  Failure to do so can result in prosecution, so banks generally err on the side of caution.

Once an SAR has been filed, the NCA has 7 working days within which to respond to the bank. In that period, the NCA can either agree that the suspension should be lifted or send a refusal letter to the bank. If the NCA refuses to give consent to the account being unfrozen, it will then have a further 31 calendar days to carry on investigations. During this period of investigation, the bank and the NCA are prohibited from disclosing anything about why the account has been frozen, as it is a criminal offence to “tip somebody off” about the existence of an SAR.

Whilst that process plays out, the courts have held that a bank can refuse to execute customer instructions, so there may be little that you can do initially. However, even where the NCA consents to a suspension being lifted within 7 days, the bank’s internal processes may lag, resulting in accounts remaining frozen. In those circumstances, keeping pressure on the bank can yield faster results.

If you find yourself in a position where an account has been frozen without notice, it is advisable to assume that this may be due to concerns around fraud or money laundering. You should therefore provide the bank with as much information as possible to comfort them that your account is not being used for any such purpose. Depending on the circumstances, if an institution then maintains a block on your account or refuses to continue providing banking services to you, there may be further steps which can be taken, such as applying to court for an injunction, making a complaint to the Financial Ombudsman, or commencing proceedings to recover any losses that you have suffered as a result of the bank’s actions.